The First Home Owner market is huge and Banks are more than willing to accommodate all types of First Home Buyers! And guess what? You don’t even need a deposit these days to get into the real estate market! This post covers important basic mortgage terminology that you will learn about while purchasing your first home and the criteria that Banks look at when assessing an application for a First Home Buyer with limited deposit and/or limited employment history. Nowadays you don’t need to save for 5 or 10 years just for a deposit to gain entry into the property market!! Do your research, find out how much you can borrow, and take the first step into property ownership!!

take the first step towards owning your first property!!

Deposit

You really don’t need a deposit to purchase property as Banks will lend you 100% of the purchase price (if you meet the Lender’s criteria as discussed below) and the Govt offers you a First Home Owners Grant (FHOG) for the fees and legals. But having a deposit will save you money on both fees and repayments and the larger the deposit the greater the saving!! Your deposit can fall into one of two categories and this will affect the Lenders Mortgage Insurance Premium (LMI) which is further explained below:
1) Genuine savings: these are savings you have saved for at least a 6 month period and can be evidenced via bank account statements. Other forms of genuine savings include shares or investments but must be held in your name for at least 6 months and evidence provided.
2) Non-genuine savings: if you do not have savings it does not mean you cannot buy your first property. Banks can lend up to 100% LVR (Loan to Value Ratio). Or, you can use gifted funds from family members to lower your LVR and thus reduce your LMI premium. However the LMI premium on non-genuine savings is higher than that for having genuine savings. Gifted funds or funds from another source are known as non-genuine savings.

Loan to Value Ratio (LVR)

LVR is a term used by every institution and basically explains what percentage of your property is secured by the loan amount. The greater your deposit in either the form of genuine or non-genuine savings, the lower your LVR will be which is a good thing as this means you have more equity in your property! And the lower the LVR, the lower your Lenders Mortgage Insurance (LMI) fee will be!

To find out your LVR you divide your loan amount by the security value x 100
Let’s look at a simple example:
Purchase price: $200,000
Savings for deposit: $20,000
Therefore loan amount must be $180,000
LVR = loan/security x 100 = 90%

If you have savings of $40,000 your LVR will be 80% ($160k/$200k = 80%)

Now, there’s a big difference between having 80% and 90% LVR. Firstly, you have a lower loan balance and will therefore have lower repayments. Secondly, at 80% you do not get charged Lenders Mortgage Insurance!! (LMI)

Lenders Mortgage Insurance (LMI)

If your LVR is over 80% you’ll get slugged with LMI which is a fee charged by every institution as with the increase in LVR becomes a higher risk associated to the Bank for your loan if things were to go bad! LMI is a fee charged to protect the Bank, not the applicant! In most cases for First Home Buyers it can’t be avoided, I certainly had to pay it…it’s just one of those things! However, like many fees, it can be capitalized on top of your loan amount so you gradually pay it off along with your loan balance.
LMI is roughly 2% of your loan amount. It differs but allow for 2% is the general rule! LMI will also be more for those with no-genuine savings than for those with genuine savings.

Employment for First Home Buyers

Most Bank policies are similar when it comes to criteria for First Home Buyers or non-genuine savings applications with LVR over 95%. The policy is usually 12 months in your current job but there is flexibility when it comes to a stable job history over the last 2 years! Meaning, if you have changed jobs within the last 12 months, then your previous job history must be in the same industry going back at least 18 months. Evidence of this will need to be provided.
At 95% LVR or below, having 6 months in your current position is enough to satisfy Bank criteria and a payslip is enough to evidence this!

Serviceability

Banks use their own assessment rates to give them comfort with servicing criteria and to make sure if there are any rates increases that the applicant has adequate income to service the loan at a higher rate. Wow, it even sounds like they care right?? Well actually, afterall, if a loan goes into arrears and the applicant is forced to sell, the Bank doesn’t make anything on that loan! Ok so for servicing on a non-genuine savings product, the minimum servicability level is usually a little higher than that of a standard product.

Always remember…

Banks may very well approve you at 100% LVR but always always leave room for additional spending and worst case scenario if something were to happen to your income!! Don’t borrow so much that you have very little left over as rates can rise and the last thing you want to happen is to be a slave to your mortgage. Purchase property within your price range and use the First Home Owners checklist. Owning property should be an enjoyable first step to wealth creation!!